Commentary (Page 464)

This is a series of articles describing how to quickly understand the key aspects of the annual report from a company that you have invested in with your hard earned money. This series started with an overview post on November 30, 2010.

The slow read

Now it is time to sit back and read the annual report slowly over the next few weeks. You know that you have already hit on the high points that are going to cause real concern. After you have looked at the previously described 7 items a few times, that entire exercise should take you no more than 20 minutes. Now you can spend time trying to truly understand the company and its revenue model.

It is important that this is a slow read. You don’t want to invest in a company that you don’t understand. When you read the report now, use a highlighter to mark important items. Take notes in the margins. You want to be a truly informed investor and be able to think about how the various actions by the market, global politics, and general business news will affect this company that you own. You should trust your managers to run the company effectively but you now have the opportunity to understand how and why they should be reacting to market conditions.

You don’t need to go into this depth for every report that the company puts out. Rather, once a year plan to spend several hours digging into the company via the annual report. This is your opportunity to really understand this company. It is your money, you need to be confident in your investment in this company.

Here are the links to all 9 posts of the series:

1. The 7 critical items to read first in an annual report in 20 minutes (Part 1 of 9)
2. The 7 critical items to read first in an annual report in 20 minutes (Part 2 of 9)
3. The 7 critical items to read first in an annual report in 20 minutes (Part 3 of 9)
4. The 7 critical items to read first in an annual report in 20 minutes (Part 4 of 9)
5. The 7 critical items to read first in an annual report in 20 minutes (Part 5 of 9)
6. The 7 critical items to read first in an annual report in 20 minutes (Part 6 of 9)
7. The 7 critical items to read first in an annual report in 20 minutes (Part 7 of 9)
8. The 7 critical items to read first in an annual report in 20 minutes (Part 8 of 9)
9. The 7 critical items to read first in an annual report in 20 minutes (Part 9 of 9)

The market is closed on Christmas Eve.  There will be no stock analysis posting today.  Please enjoy your family.

This is a series of articles describing how to quickly understand the key aspects of the annual report from a company that you have invested in with your hard earned money. This series started with an overview post on November 30, 2010.

7. Dividends

I typically do not like dividends. There are truly bad companies on the market that use dividends to keep their stock holders satisfied rather than using that money to grow the company and create long-term growth. Also, I buy a stock when its price is growing and sell it when the market is moving against the stock; therefore, I may miss a dividend payout in order to preserve my capital during a market correction. When you become addicted to dividends, you lose the perspective that the company may not be performing adequately or you may be tempted to stay with a stock during a price correction that ultimately erodes your investment cash.

I personally prefer that the company keep its dividend to a minimum and use its cash to grow the company faster. This will cause the stock price to appreciate in the long term. Your investment strategy may be different though.

Even though I don’t make my decisions based on dividends, it is important to understand what the company is doing regarding dividends. The annual report is the communication vehicle for the management of the company to tell you, the owner, how much you will be receiving for your dividend check.

You need to be comfortable with this payout. Is it adequate? Is it hurting the other investments the company could be making? Is it increasing enough to fit your goals?

Here are the links to all 9 posts of the series:

1. The 7 critical items to read first in an annual report in 20 minutes (Part 1 of 9)
2. The 7 critical items to read first in an annual report in 20 minutes (Part 2 of 9)
3. The 7 critical items to read first in an annual report in 20 minutes (Part 3 of 9)
4. The 7 critical items to read first in an annual report in 20 minutes (Part 4 of 9)
5. The 7 critical items to read first in an annual report in 20 minutes (Part 5 of 9)
6. The 7 critical items to read first in an annual report in 20 minutes (Part 6 of 9)
7. The 7 critical items to read first in an annual report in 20 minutes (Part 7 of 9)
8. The 7 critical items to read first in an annual report in 20 minutes (Part 8 of 9)
9. The 7 critical items to read first in an annual report in 20 minutes (Part 9 of 9)

This is a series of articles describing how to quickly understand the key aspects of the annual report from a company that you have invested in with your hard earned money. This series started with an overview post on November 30, 2010.

6. Shares outstanding and Stock repurchase

You will almost definitely need to search for these terms in order to read about this information. The discussion will likely be buried in the report and not obvious in the Table of Contents.

You need to understand why the shares outstanding changed. Did the company buy back a lot of shares via a stock repurchase plan? Did they issue more shares?

There is no right answer for this metric but you need to understand what happened and you need to be comfortable with the reason. Was this change in your long-term best interest even if it hurt you in the short term? You definitely want to make sure that the company is not changing this number to hide some other shortcoming.

While stock repurchasing is a way to increase the stock price of the company, it generally means that the company is using its own cash to buy its stock. This means that the company isn’t using its money to pay for long-term assets or revenue producing assets. Do you really like the idea that the company is putting $5,000,000 into its own stock rather than spend that money on better marketing or more product development?

Here are the links to all 9 posts of the series:

1. The 7 critical items to read first in an annual report in 20 minutes (Part 1 of 9)
2. The 7 critical items to read first in an annual report in 20 minutes (Part 2 of 9)
3. The 7 critical items to read first in an annual report in 20 minutes (Part 3 of 9)
4. The 7 critical items to read first in an annual report in 20 minutes (Part 4 of 9)
5. The 7 critical items to read first in an annual report in 20 minutes (Part 5 of 9)
6. The 7 critical items to read first in an annual report in 20 minutes (Part 6 of 9)
7. The 7 critical items to read first in an annual report in 20 minutes (Part 7 of 9)
8. The 7 critical items to read first in an annual report in 20 minutes (Part 8 of 9)
9. The 7 critical items to read first in an annual report in 20 minutes (Part 9 of 9)

This is a series of articles describing how to quickly understand the key aspects of the annual report from a company that you have invested in with your hard earned money. This series started with an overview post on November 30, 2010.

5. Backlog

Some companies will have a backlog of orders. The easiest way to find this discussion is by searching for ‘backlog’ using your browser or reader.

Having a backlog is not necessarily a bad thing. In fact, it is sometimes a great thing as it shows that customers really want the company’s products and they are willing to wait for them. It also may show that revenue growth is being controlled to flatten out peaks and valleys – this is often a good thing.

Backlog often means that customers are buying faster than the company can process and ship the product. If the company is cyclical in its orders than perhaps they have decided to only have a certain number of personnel shipping orders. If that capacity is exceeded occasionally then the customer will have to wait. This often means that the company is able to control costs.

It is possible though that backlog that continues to grow from year to year is a bad thing. This could be a sign that your company is sacrificing customer satisfaction for cost controls and they are not staffing correctly.

Changes to backlog relative to the size of the company should cause concern. Something has changed in the operations of the company if this number doesn’t stay relatively static. Make sure you are comfortable with the company’s description of the change.

Here are the links to all 9 posts of the series:

1. The 7 critical items to read first in an annual report in 20 minutes (Part 1 of 9)
2. The 7 critical items to read first in an annual report in 20 minutes (Part 2 of 9)
3. The 7 critical items to read first in an annual report in 20 minutes (Part 3 of 9)
4. The 7 critical items to read first in an annual report in 20 minutes (Part 4 of 9)
5. The 7 critical items to read first in an annual report in 20 minutes (Part 5 of 9)
6. The 7 critical items to read first in an annual report in 20 minutes (Part 6 of 9)
7. The 7 critical items to read first in an annual report in 20 minutes (Part 7 of 9)
8. The 7 critical items to read first in an annual report in 20 minutes (Part 8 of 9)
9. The 7 critical items to read first in an annual report in 20 minutes (Part 9 of 9)